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Impact investing must benefit communities, rather than just save government money or create new deals for the finance sector, the peak body for not for profits has said.

Last month the federal government released a discussion paper exploring, for the first time, ways it can develop the impact investing market in Australia, with a focus on the affordable housing supply.

In its response, sent to the government on Monday, the Community Council for Australia (CCA) welcomed the government’s interest in impact investing but warned communities must be a key priority.

“CCA strongly supports the potential of impact investing to bring about positive changes in our communities,” it said.

“NFPs are keen to be part of the emerging impact investing market and to find new ways of working across government and across private investors, but only when the focus is on improving our communities.”

The submission outlined barriers preventing not-for-profit organisations from engaging in impact investment, as well as areas where there is scope for improvement.

“Many NFPs would welcome new investment, but have limited exposure to the investment market,” it said.

One of the main barriers the CCA identified was scale and investment readiness, particularly the limited resources to enable not for profits to develop proposals.

“If it costs $150,000 to set up an impact investment deal – meeting costs, legal costs, business cases and appropriate expert advice – then even a deal of $2 million has already lost 7.5 per cent before it starts so an investment needs to return over 13 per cent to be worth pursuing,” the CCA said.

“The vast majority of NFPs cannot offer scalable investments. Only 5 per cent of all charities have a turnover greater than $10 million.

“Even if a charity has a scalable investment proposal, how do they do the work required to translate a good idea into an investment ready proposal? This work is expensive and time consuming, and requires a level of expertise that usually needs to be brought into most charities.”

Impact Investing Australia and other organisations were applauded for creating funds to assist not for profits to develop investment ready proposals, but the CCA said a “great deal” more work needs to be done in this space.

“Experience overseas, particularly in the UK, suggests that early support for the development of investment ready proposals is a critical component in building the impact investing capital market,” CCA said.

“There is scope for government and investors to support the role of intermediaries and new investment readiness funds to help build a smoother runway for charities and NFPs willing and able to use impact investing as a way of improving their communities.”

Measurement, which is a critical component of impact investments, was highlighted as a challenge for not for profits.

“There is no contention that measurement of outcomes and impact is strongly supported within the NFP sector,” CCA said.

“Time and again… research and consultations have highlighted that it is not a lack of will that impedes better measurements across the sector, but a lack of resources – predominantly time and expertise.

“Time and again governments and other funders refuse to fund appropriate resources to enable meaningful measurement frameworks to be developed.”

CCA said investment in better outcomes measurement should be a major priority for the government and said it was also a “clear priority for anyone interested in promoting or extending the level of impact investing in Australia”.

A common evaluation and measurement framework to be adopted by not for profits and supported by funders was recommended.

The submission also said the removal of red tape and other government barriers was essential to free up capital for investments.

“New impact investing guidelines are needed to offer comfort to superannuation trustees and trustees of public and private ancillary funds if impact investing is to be seen as legitimate way of managing their investment funds,” it said.

“Adopting a system where people can choose to have a percentage of their superannuation contribution invested in impact investment funds has been successful overseas and would certainly stimulate the impact investing market in Australia.”

The overall role of government was the final area the CCA identified as having scope for improvement.

It said while governments talk about reducing costs and focusing on outcomes, their investment approach rarely reflects its policy goals.

“Most government officials view any investment where there is an expectation of a financial return as carrying much higher levels of risk than grant making,” CCA said.

“This approach reduces government contracting to activity-based performance measures and the counting of services. There is very little measurement of outcomes or the achievement of policy goals.

“Similarly, governments tend to be reluctant to offer longer term guarantees of funding, or to underwrite risk outside of grant processes. Even co-investing with private equity presents a challenge to many government departments.

“New emerging vehicles for impact investing, such as government bonds and pay on result approaches, have been difficult to establish despite the positive benefits they provide to many communities. Consequently, governments around Australia are not significant players in the Australian impact investing space.”

CCA said, for not for profits, each government procurement process seems to operate in a vacuum with little use of past performance data to inform future contracting.

“All too often the fundamental elements that drive performance – the competency and capacity of the individuals, management teams, organisations, their relationship with their customers and their communities, the capitalisation, business plans, other investors, competitors… are simply not [considered],” it said.

“If government is genuinely interested in promoting impact investing there are many well-informed and demonstrated policies readily available that would not only stimulate the market, but also drive new investment.”